Comparing Bitcoin and Other Cryptocurrencies by 'Market Cap' Can Be Very Misleading

Kyle Torpey
, ContributorI've been a full-time Bitcoin writer and researcher since early 2014.Opinions expressed by Forbes Contributors are their own.

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Although bitcoin was launched as the only cryptocurrency in the world back in 2009, there are now thousands of alternatives that can be traded on various online exchanges. Many cryptocurrency traders track the price of these digital assets on sites like CoinMarketCap.com, but the key metric that is most often used to compare these cryptocurrencies, market cap, can sometimes be misleading.

Having said that, there are a few alternative metrics that can be used to compare the different digital assets found in the world today.

What’s Wrong with Market Cap?

While market cap is usually a useful metric for tracking the total valuation of a company, the same is not true in the world of cryptocurrencies. This is because there are often situations where the units included in the calculation for a coin’s market cap — simply the number of coins multiplied by the current price in US dollars — are not easily available for trade.

For example, the long-forgotten Auroracoin, which was targeted towards citizens of Iceland, was said to have a market cap of over $1 billion back in early 2014, but the reality was that a large number of the coins were locked up and unavailable for trade because they had yet to be airdropped onto the Icelandic public. In reality, the Auroracoin market cap was closer to just over $10 million.

Steem was another notorious example of an inflated cryptocurrency market cap. The market cap was reported as more than $400 million in July 2016, but this was due to a large amount of Steem being locked up as Steem Power, which is used as a sort of fuel to vote on the social media platform built around the token. Much of the new Steem coming into existence was locked up as Steem Power by default, and only a fraction of that new Steem was actually going into circulation.

In addition to these sorts of situations where new supply cannot actually be traded on an exchange, there are also numerous situations where one entity holds a large amount of the coins in existence from the start. If this entity (or a cartel of entities) keep their holdings off exchanges, they can create a situation where there is a meaninglessly high market cap for a coin with not much activity around it.